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1 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 1 of 9 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: CARLA CRAIG-LIKELY, Debtor, / CARLA CRAIG-LIKELY, v. Appellant, CIVIL CASE NO HON. MARIANNE O. BATTANI WELLS FARGO HOME MORTGAGE, Appellee. / OPINION AND ORDER REVERSING THE JULY 27, 2006, ORDER I. INTRODUCTION Before the Court is Carla Craig-Likely s August 17, 2006, appeal of an order issued by the Bankruptcy Court for the Eastern District of Michigan, Southern Division (Doc. # 1). Craig- Likely appeals a July 27, 2006, ruling by the bankruptcy court that denied her motion to deny Wells Fargo s post-petition arrearage claim. II. STATEMENT OF FACTS On May 28, 2002, Carla Craig-Likely filed a bankruptcy petition. The Chapter Thirteen petition was filed because Craig-Likely was approximately three months behind on her mortgage, and wished to avoid foreclosure. 1

2 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 2 of 9 On July 29, 2002, Wells Fargo, Craig-Likely s mortgagee, filed a proof of claim, which showed that her current, monthly pre-petition mortgage payment was $ The proof of claim stated that Craig-Likely had an arrearage of $4, The arrearage consisted of three months of principal and interest on the loan, an escrow account shortage, which was to pay for insurance and taxes, a late fee, and inspection fees. This amount was not disputed. Pursuant to the mortgage, if the amount withheld in the escrow account for insurance and taxes was insufficient, Wells Fargo agreed that it may notify the borrower and require the borrower to make-up the shortage as permitted by the Real Estate Settlement Procedures Act ( RESPA ), 12 U.S.C et seq. 1 Upon agreement by Wells Fargo s counsel, Craig-Likely s forty-eight month bankruptcy plan was confirmed on October 10, It called for her to pay off her arrearages over a thirty six month period. As of April 11, 2006, the bankruptcy trustee s records showed that the pre-petition arrearage of $4,094 Craig-Likely owed to Wells Fargo was paid in full. However, on April 11, Wells Fargo served Craig-Likely s counsel with a letter detailing changes in her monthly mortgage payments between June 1, 2002, and July 1, According to the letter, her mortgage payment as of July 1, 2005, was $1, per month. The letter also detailed four previous changes that occurred to the monthly payment over the three-year period. Per the letter, the first change occurred on June 1, 2002, before Craig-Likely s bankruptcy plan was confirmed. That change altered her monthly mortgage payment from $ to $1, Despite the language in the mortgage, if a mortgage loan is federally related, RESPA mandates that the lender to notify the borrower not less than annually of any shortage of funds in the escrow account. 12 U.S.C. 2609(b) 2

3 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 3 of 9 According to the letter, a second mortgage adjustment occurred on June 1, 2003, which raised Craig-Likely s mortgage payment to $1,295.72, a third adjustment on December 1, 2003, which raised her monthly payment to $ , and a fourth on December 1, 2004, which decreased her monthly payment to $1, These changes in Craig-Likely s monthly mortgage payments resulted from shortages in the escrow account, which in turn, were caused by changes in the amount needed to cover the insurance premiums and tax payments. According to Wells Fargo, a notice was sent to Craig-Likely, her counsel, and the bankruptcy trustee notifying them of changes. However, according to Craig-Likely, her attorney, and the bankruptcy trustee, not one of the notices that Wells Fargo contends it sent between June 1, 2002, and July 1, 2005, were received. Because she did not receive notice of the changes in her monthly payments until April 11, 2006, she faced a post-bankruptcy petition arrearage to Wells Fargo of $13, On May 5, 2006, Craig-Likely filed a motion in bankruptcy court, asking the court to foreclose Wells Fargo from asserting a post-petition arrearage claim. Craig-Likely argued that Wells Fargo should not be allowed to collect the arrearage because Wells Fargo violated Local Bankruptcy Rule when it failed to serve the trustee, the debtor, and the debtor s counsel with a statement of the increase or decrease of her mortgage payments. The bankruptcy court judge held an evidentiary hearing to determine whether Wells Fargo sent the notices. On June 26, 2006, the bankruptcy court judge found that Wells Fargo did not send the notices as required. In an attempt to facilitate a settlement between the parties, the bankruptcy court judge adjourned the matter until July 27, The parties did not reach a settlement. 3

4 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 4 of 9 At the July 27, hearing, the bankruptcy court reiterated its finding that Wells Fargo violated the rule, but declined to discharge the post-petition debt because such an act would be an inappropriate and overly harsh remedy.... July 27, 2006, Hrg. Tr., at 10. Craig-Likely asserts that the bankruptcy court erred when it failed to sanction Wells Fargo for violating the local rule. III. STANDARD OF REVIEW In bankruptcy cases, the district court is required to review the bankruptcy court s legal conclusions de novo and review factual questions on a clearly erroneous standard. In re Burns, 322 F.3d 421, 425 (6th Cir. 2003). IV. ANALYSIS Wells Fargo contends the tax and insurance advances it made on her behalf are postpetition debts that are not modifiable and not subject to discharge under 13 U.S.C. 1322(b)(2) & (b)(5), notwithstanding the fact that the bankruptcy court found that it did not notify Craig- Likely of the escrow deficiencies that began in June 2002, until April of As a result, Wells Fargo asserts that this Court should uphold the bankruptcy court s order. Craig-Likely argues that Wells Fargo failed to serve either her, her counsel, or the trustee with a notice that the periodic mortgage payments would be altered by the increase in tax liability and insurance premium. Craig-Likely argues that because Wells Fargo failed to adhere to the court rules, she should not be liable for deficiency that accrued as a result. Local Bankruptcy Rule ( LBR ) reads: The holder of a type of claim governed by Code 1322(b)(5) or (b)(7) shall serve the trustee, the debtor, and the debtor s counsel, if any, with a statement of the increase or decrease of periodic payments prior to the effective date 4

5 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 5 of 9 of the adjustment of the payment amount. Section 1322(b) of the United States Code provides in relevant part: (b) Subject to subsections (a) and (c) of this section, the plan may (2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; (5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due; 11 U.S.C. 1322(b). Because Craig-Likely s last mortgage payment is due well after the final payment was due under the bankruptcy plan, 1322(b)(5) applies. The general rule under section 1322(b)(2) is that a bankruptcy court is prohibited from confirming a Chapter 13 plan that modifies a mortgagee s property rights in the mortgagor s homestead. Chase Manhattan Mortg. Corp. v. Padgett, 268 B.R. 309, 312 (S.D. Fla. 2001)(citing Nobelman v. Am. Savings Bank, 508 U.S. 324 (1993)). Nevertheless, [i]n order to determine [the lender s] rights under the mortgage and note..., it is necessary to determine [the lender s] duties under the mortgage and note. As a federally related mortgage loan, [Craig-Likely s] mortgage is subject to the notice requirements of the federal Real Estate Settlement Procedures Act ( RESPA ). 12 U.S.C. 2609(b). 2 Padgett, 268 B.R. 309, 313 (S.D. Fla. 2001). Here, the mortgage terms provide for Wells Fargo to deposit portions of the payments in an escrow account to cover property taxes and insurance premiums. 2 Wells Fargo does not contest that Craig-Likely s mortgage is a federally related mortgage loan, or that it is subject to RESPA s requirements. 5

6 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 6 of 9 If the terms of any federally related mortgage loan require the borrower to make payments to the servicer (as the term is defined in section 2605(i) of this title) of the loan for deposit into an escrow account for the purpose of assuring payment of taxes, insurance premiums, and other charges with respect to the property, the servicer shall notify the borrower not less than annually of any shortage of funds in the escrow account. 12 U.S.C. 2609(b). Wells Fargo argues that it did not violate federal law when it did not notify the Craig-Likely of the escrow shortages because there is an exemption to this requirement if the borrower is in bankruptcy. (2) No annual statements in the case of default, foreclosure, or bankruptcy. This paragraph (i)(2) contains an exemption from the provisions of (i)(1).... This exemption also applies in situations where the servicer has brought an action for foreclosure under the underlying mortgage loan, or where the borrower is in bankruptcy proceedings. 24 C.F.R (i)(2). Section (i)(1) mandates that a lender submit an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. Thus, if the borrower is in bankruptcy, the lender is no longer obligated to provide an annual statement. However, this exemption is inapplicable. Even though the monthly statement must contain, among other things, detailed information regarding the escrow account, including whether a deficiency or surplus exists, the lender is not thereby relieved of notifying the borrower of an escrow account deficiency. The servicer shall notify the borrower at least once during the escrow account computation year if there is a shortage or deficiency in the escrow account. The notice may be part of the annual escrow account statement or it may be a separate document. 24 C.F.R (f)(5). Thus, although a lender does not have send an annual escrow account statement if the borrower is in bankruptcy, the lender is not thereby relieved of the statutory duty to notify the borrower not less than annually of any shortage of funds in the 6

7 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 7 of 9 escrow account. 12 U.S.C. 2609(b). This duty can be fulfilled through sending the annual escrow account statement, or it may be fulfilled by sending a separate document. 24 C.F.R (f)(5). Thus, whether the lender chooses to continue to provide the borrower with an annual escrow account statement, or notify the borrower of a deficiency through a separate document[,] is left to the lender. However, this duty cannot be disregarded completely. The Court finds that the bankruptcy court s factual findings that Wells Fargo did not send notices as required is not clearly erroneous. Thus, Wells Fargo violated LBR and RESPA went it did not notify Craig-Likely, her counsel, or the bankruptcy trustee of the changes in her monthly mortgage payment due to an escrow account deficiency. Nevertheless, Wells Fargo argues that Chapter 13 bankruptcy only provides for discharge of pre-petition debt, and thus, the post-petition escrow shortages cannot be discharged even if it ignored the Local Rules and federal law. In a similar case in Florida, a mortgage company did not provide the required notices of a change in an escrow account balance because it claimed sending the notices would violate the automatic stay. Padgett, 268 B.R The bankruptcy court confirmed a modification to the debtors plan that did not grant the mortgage company s request to recover the past advances. The bankruptcy court held that the mortgage company waived its right to recover the advances pursuant to the mortgage and note by failing to notify the Padgetts of the tax and insurance increases and the need to increase their payments to cover the escrow deficiencies. Id., at 312. Thus, the effect of the order was not to discharge the postpetition debt, but rather, to foreclose the mortgage company from asserting a claim. The bankruptcy court s order was affirmed by the district court. The court found that because Chase failed to comply with the notice requirements under RESPA and section of the Florida 7

8 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 8 of 9 Statutes, the Bankruptcy Court did not err as a matter of law in concluding that Chase waived its right to recover the advances. Id., at 314. This Court finds its sister court s reasoning sound. The effect of finding that Wells Fargo has waived its right to assert a claim to the post-petition debt is not the same as the Court finding that post-petition debt has been discharged. In other words, the Court would not have to discharge Craig-Likely s post-petition debt in order to find that Wells Fargo waived its right to recover the advances because it violated federal law and the local rules for three years. Finally, Wells Fargo argues that issues of equity weigh against overturning the bankruptcy court s order. It asserts that Debtor is looking for a windfall after it paid her taxes and insurance on her behalf, avoiding tax forfeiture. However, this overlooks the fact that Wells Fargo was contractually obligated to pay the taxes and insurance from the escrow account. It also overlooks the fact that Wells Fargo was statutorily obligated to provide Debtor with notice of the shortage, and that it was obligated by this Court s rules to notify Debtor of a change in the periodic payment amount. Wells Fargo did not meet its obligations. As a result, Debtor, who entered bankruptcy because of $4,000 in mortgage arrearages, is now faced, after paying off the mortgage arrearage, with $13,000 in tax and insurance arrearages because Wells Fargo did not obey the law or this Court s rules. Therefore, the Court finds equity does not weigh in Wells Fargo s favor, and concludes that Wells Fargo has waived its right to assert a claim for the postpetition arrearages. 8

9 Case 2:06-cv MOB-VMM Document 9 Filed 03/02/2007 Page 9 of 9 V. CONCLUSION Accordingly, IT IS HEREBY ORDERED that the bankruptcy court s order of July 27, 2006, be and is hereby REVERSED and REMANDED with directions that the bankruptcy court enter an amended order in accordance with this court s opinion. IT IS SO ORDERED. s/marianne O. Battani MARIANNE O. BATTANI UNITED STATES DISTRICT JUDGE DATED: March 2, 2007 CERTIFICATE OF SERVICE Copies of this Order were served upon counsel of record on this date by ordinary mail and/or electronic filing. s/bernadette M. Thebolt DEPUTY CLERK 9

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